Anatomy of an Asset Purchase Agreement

Asset Purchase Agreements (APAs) are essential documents for asset sales, but they're far more complex than a simple transaction. Unlike Stock Purchase Agreements (SPAs), which govern stock sales, APAs involve the sale of specific assets and liabilities, requiring a detailed enumeration.

While both SPAs and APAs share many terms, they differ in crucial aspects. For example:

APAs itemize acquired assets and assumed liabilities explicitly, unlike SPAs, which reference transferred shares.
APAs require legal instruments for asset ownership transfer, like bills of sale and assignment agreements, while SPAs don't need these since assets transfer through stock ownership.
Representations and warranties in APAs focus on asset sufficiency for business operations after closing, unlike SPAs, which do not describe acquired shares.

Additionally, in asset transactions, "Shared Assets" used in both the seller's and acquired business need special treatment in the deal.

In subsequent discussions, I'll delve deeper into each section of an APA and provide detailed insights into their contents. You can also refer to a sample APA, such as the MSC Industrial Direct Co., Inc. and Barnes Group Inc. agreement for their distribution services business assets, though agreements may vary in structure and specifics.

Preamble and Recitals

The initial section of an APA, called the Preamble, introduces the agreement, identifies involved parties, and outlines the contract's effective date. Often, it establishes defined terms like "Seller" and "Purchaser."

Following the Preamble, the APA typically includes a section called the Recitals. These statements, prefaced with "WHEREAS," don't usually carry binding obligations. Instead, they express the intentions of the parties and offer context for interpreting the APA in the future.

Article 1: Definitions

Article 1 in most APAs outlines a set of definitions for key terms used throughout the agreement. These defined terms are not standalone provisions but are integrated into other operational sections of the contract. They may seem like standard or complex jargon when read independently, but they hold significant importance as they can substantially influence the meaning of the provisions where they are utilized. Some terms, like "Liabilities," "Material Adverse Effect," or "Seller’s Knowledge," are pervasive in the agreement and often undergo thorough negotiation. Others such as "Acquired Assets," "Acquired Business," "Assumed Liabilities," "Retained Assets," and "Retained Liabilities" are pivotal in defining the specifics of the transaction, determining precisely what each party is acquiring or retaining in the deal.

In addition to defining terms, this section often includes references to terms defined elsewhere in the APA and a segment dedicated to the rules of interpretation that apply to the contract.

Article 2: The Transaction

Article 2 of a typical APA outlines the specific terms of the sale. It generally states that, subject to the agreement's provisions and unless specified in Section 2.2 concerning Excluded Assets, at the Closing, the Seller will transfer to the Purchaser all of its rights, title, and interest in various properties and assets used exclusively in the Acquired Business, free of any claims or limitations except for Permitted Encumbrances. This section also defines Excluded Assets, which the seller retains, Assumed Liabilities, assumed by the buyer, and Excluded Liabilities, remaining with the seller. Additionally, Article 2 covers the purchase price, any adjustments to it (like changes in target net working capital at closing), and outlines the documents and items to be exchanged during the closing process. These may include bills of sale, assignment agreements, intellectual property transfers, real estate documents, alongside legal opinions, employment contracts, escrow agreements, and other supplementary documents.

Article 3: Seller Representations and Warranties

Article 3 in many Asset Purchase Agreements encompasses the seller's representations and warranties concerning the target business. Similar to prior discussions, representations and warranties are assertions of past or present factual information about the acquired assets, encompassing aspects like assets, liabilities, properties, condition, financial performance, operations, and future prospects. Inaccurate statements within these representations and warranties can lead to potential liabilities for the party providing the information.

Here’s a long list of subjects that may be addressed by seller representations and warranties:

organization and good standing
authority and enforceability
absence of conflicts
capitalization and ownership
financial statements
books and records
accounts receivable and accounts payable
inventories
absence of undisclosed liabilities
absence of certain changes and events
assets (including sufficiency of assets)
real property
intellectual property
material contracts
tax matters
employee benefits
employment and labor
environmental, health and safety
compliance with law
legal proceedings
customers and suppliers
product warranties
product liability
insurance
related-party transactions
guarantees
brokers and finders fees
solvency and
full disclosure.

Few, if any, transactions will include all of these representations and warranties, and many of them overlap at least in part.

Article 4: Buyer Representations and Warranties

Article 4 commonly encompasses corresponding assurances and guarantees from the buyer to the seller. In some cases, these assurances might be included within a different portion of Article 3 alongside the seller's assurances. If the buyer is paying through shares, its assurances generally align closely with those provided by the seller. However, in transactions predominantly involving cash payment, the buyer's assurances are typically narrower in scope. After all, cash transactions tend to focus on the straightforwardness of the payment method.

Buyer representations and warranties frequently cover some combination of the following topics:

organization and good standing
authority and enforceability
absence of conflicts
governmental consents
legal proceedings
financing
brokers and finders fees and
independent investigation.

Article 5: Covenants

If your deal involves a gap between signing and closing, Article 5 in the Asset Purchase Agreement typically includes commitments, known as covenants, from both parties regarding their actions during this interim period and after the deal is sealed.

One common covenant involves granting the buyer access to the acquired business and its records before closing, allowing the buyer to continue planning and integrating the acquired entity.

The agreement often mandates that the seller operates the acquired business in the usual manner consistent with past practices until the deal closes. This section might outline specific actions permitted or restricted for the seller, aiming to maintain the business in a state similar to what the buyer examined during due diligence. The more detailed these requirements, the more advantageous it usually is for the buyer, ensuring the business remains aligned with their expectations.

Moreover, this article typically necessitates the seller to promptly inform the buyer of any significant developments affecting the acquired business or the transaction. Not only does this ensure the buyer receives timely information about its soon-to-be-owned business, but it may also allow the buyer to declare a material breach or failure of a closing condition if notified about such issues.

Another common covenant involves both parties making diligent efforts to finalize the transaction, including obtaining necessary regulatory approvals and securing consents from third parties. This becomes crucial in asset transactions, where the direct transfer of individual assets demands compliance with various legal and contractual requirements, unlike stock sales involving indirect transfers.

Other covenants you may encounter in Article 5 include provisions governing:

confidentiality
no-shops
public announcements
preparation of interim financial statements
seller cooperation with financing
customer communications
employee matters
fraudulent conveyance law and satisfaction of seller obligations to creditors
indemnification and insurance
non-competition
non-solicitation
treatment of shared assets and intercompany arrangements
use of the seller’s retained names and marks
handling of mail and other communications and
production of witnesses and attorney-client privilege.

Article 6: Closing Conditions

Once again, in a scenario where there's a gap between signing and closing, the Asset Purchase Agreement will outline conditions precedent that must be met or waived before the parties are obligated to finalize the transaction. These conditions typically involve ensuring that the other party's representations and warranties were accurate when made and are still accurate at closing. It also encompasses the fulfillment of pre-closing commitments by the other party.

Naturally, all necessary regulatory approvals and consents from third parties need to be obtained as part of these conditions. Additionally, the buyer often requires a condition ensuring that the acquired business hasn't undergone a significant adverse change—one that impacts its long-term earnings capability. Sometimes, the buyer might push for conditions related to securing financing or completing the due diligence process satisfactorily.

Article 7: Indemnification

Another section in the Asset Purchase Agreement addresses indemnification rights, allowing each party to seek compensation from the other for losses resulting from breaches in representations, warranties, and covenants. These indemnification provisions might also cover losses related to specific issues, like an identified environmental concern. Sellers typically indemnify buyers for losses linked to "Retained Liabilities," while buyers reciprocate by indemnifying sellers for "Assumed Liabilities."

This Article will not only outline each party’s basic rights to indemnity. It also typically:

establishes a survival period for representations and warranties after which claims for breach cannot be brought,
sets limits on indemnification, including a threshold or deductible and a cap,
if applicable, outlines the use of any funds deposited in escrow for indemnification,
lays out procedures to be followed to make indemnification claims and to handle third party claims,
indicates the extent to which indemnification is a party’s exclusive remedy for breaches and
clarifies how losses should be calculated for purposes of any recovery.

Article 8: Termination

Article 6 of an Asset Purchase Agreement details the termination rights of each party in the event that conditions to closing are not met or waived. These rights encompass termination due to various reasons, including failure to meet conditions, mutual consent, a material adverse effect, legal injunctions, failure to obtain necessary consents, or missing the specified deadline for closure.

Furthermore, this section outlines the consequences of termination, specifying which provisions persist post-termination (e.g., confidentiality terms), potential compensation owed by one party to the other, and the continued responsibility for pre-termination breaches.

Article 9: General Provisions

Finally, virtually every APA will contain an Article dedicated to miscellaneous provisions governing a variety of subjects, including expenses, governing law, notice, dispute resolution, expenses, severability, counterparts, assignment, amendment and more.

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Requirements	Equity Standard	Market Value of Listed Standard	Net Income Standard
Listing Rules	5505(a) and 5505(b)(1)	5505(a) and 5505(b)(2)	5505(a) and 5505(b)(3)
Stockholders Equity	$5 million	$4 million	$4 million
The market value of publicly held shares	$15 million	$15 million	$ 5 million
Operating History	Two years	N/A	N/A
The market value of listed securities	N/A	$50 million	N/A
Net income from continuing operations (in the latest fiscal a year or in two of the last three fiscal years)	N/A	N/A	$750,000
Publicly held shares	1 million	1 million	1 million
Bid Price	$4	$4	$4)
Closing Price	$3	$2	$43
Corporate Governance	Yes	Yes	Yes
Total Shareholders	300	300	300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

Securities Lawyer Blog

Anatomy of an Asset Purchase Agreement

Listing Criteria For NasdaqFor a company to list its securities on Nasdaq, it must satisfy the following criteria:

Licensed in District of Columbia, State of Colorado, US District Court for the District of Columbia, US District Court for the District of Colorado, with pro hac vice Admission for the State of Maryland and Virginia.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria: